Institutional investors are reluctant to buy or sell large quantities of a security because simply offering to buy or sell a large quantity of a security affects the price. For example, if a hedge fund offers to sell 100,000 shares of stock in IBM, the price of the stock will drop because of an increase in supply. This problem is exacerbated when other investors see that the hedge fund is selling 100,000 shares of IBM, and they interpret that offer as a signal that the hedge fund's managers expect the stock price to fall. Consequently, these other investors may also try to sell their shares in IBM based on their interpretation of the hedge fund's motivation in making the offer. This results in a further increase in supply that pushes the stock price even lower. By the time the hedge fund successfully sells all 100,000 shares, the price may be significantly lower than when the initial offer was made. As a result, the shares of IBM that the hedge fund still holds may be reduced in value. In effect, the market's interpretation of the hedge fund's motivation becomes a self-fulfilling prophecy. Consequently, the liquidity of the hedge fund's investments is inhibited and its ability to profitably manage its portfolio is diminished.
In order to avoid these consequences, an investor can request that his broker try to arrange a cross trade at the all-day volume weighted average price (“all-day VWAP”). If the broker can find someone to accept the investor's all-day VWAP cross trade offer, both parties lock into the trade before the market opens. When the market closes for the day, the broker calculates the all-day VWAP of the security for that trading day and executes a cross trade at the all-day VWAP. Neither buyer or seller is able to rescind the offer based on any events that take place after the market opens.
Investors are reluctant to use an all-day VWAP cross trade, however, because they are locked out of the market for the entire trading day. Consequently, even if the price of a security changes dramatically during the course of the day, the investor is committed to execute the cross trade at the end of the day. It remains challenging for investors to trade large quantities of securities without the current disadvantages.